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What is it?

What is it?. Life insurance provided to a group of employees under a group insurance contract held by the employer If plan qualifies under IRS Code Sec. 79, the cost of the first $50,000 of insurance is tax-free to employees. When is it indicated?.

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What is it?

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  1. What is it? • Life insurance provided to a group of employees under a group insurance contract held by the employer • If plan qualifies under IRS Code Sec. 79, the cost of the first $50,000 of insurance is tax-free to employees

  2. When is it indicated? • Virtually all employees have need of basic life insurance • Tax advantage for first $50,000 coverage makes it a common employee benefit, at least to that face value • Group-term plans may also provide cost-effective life insurance coverage in amounts above $50,000

  3. Design Features: Nondiscrimination Requirements • Sec. 79 prescribes rules to prevent discrimination in favor of key employees (as defined in IRC) • Nondiscrimination requirements do not apply to plans of churches, synagogues, or certain related organizations • If rules are not met, key employees lose tax advantage on first $50,000 of coverage

  4. Design Features: Coverage Rules Plan must • benefit at least 70% of all employees • benefit a group of which at least 85% are not key employees • benefit a nondiscriminatory classification of employees • meet Sec. 125 nondiscrimination rules if in a cafeteria plan

  5. Design Features: Benefit Rules • Benefits must not discriminate in favor of key employees • All benefits available to key employees must be available to other plan participants • If life insurance coverage is same % of compensation for all employees will not violate benefit nondiscrimination rule

  6. Design Features: Who Can Be Excluded • Employees who have not completed 3 years of service • Part-time or seasonal employees • Employees who are part of a collective bargaining unit that has engaged in good faith bargaining on issue of death benefits

  7. Requirements of Section 79 Regulations To obtain the $50,000 exclusion, policy must • provide a general death benefit • be provided to group of employees as compensation for services • be carried directly or indirectly by employer • determine insurance amounts by formula that precludes individual selection

  8. Group Life Insurance Carve-Out for Executives Concept • Executives may be able to obtain better coverage if removed from employee group covered by a group-term life contract

  9. Group Life Insurance Carve-Out for Executives Advantages of carve-out coverage over group-term • Executives can have more coverage than provided under group-term plan • Plan can provide portable cash growth • Cost to employer can be favorable • Carve-out can save an otherwise discriminatory plan

  10. Group Life Insurance Carve-Out for Executives How to structure the carve-out coverage • All methods used to finance executive life insurance are generally available for carved-out benefits - bonus or Sec. 162 plans - split dollar plans - death benefit only plans • Design plan to avoid designation as Sec. 79 status

  11. Tax Implications • Cost of first $50,000 of coverage is tax-free to employee • Employer paid premium for additional insurance is treated as taxable income to employee using Table I rates • Tax-free death benefit to beneficiary • Employer can deduct premiums paid as business expense

  12. Tax Implications • Employer can deduct premiums paid as business expense • Employer must pay employment taxes on extra compensation that employee includes in income as result of plan coverage over $50,000 or as result of compliance with nondiscrimination rules

  13. ERISA and Other Requirements Group-term life insurance is a “welfare benefit plan” and subject to all applicable ERISA requirements

  14. Alternatives • Life insurance in a qualified plan • Split dollar life insurance • Death benefit only (employer death benefit) • Personally owned insurance

  15. True or False? • All premiums for group term life insurance are tax free to the employee. • When applying the percentage tests, all employees must be included. • A carve-out plan allows an employer to treat highly compensated employees differently than rank-and-file employees.

  16. True or False? • When an employer pays the premiums, life insurance beneficiaries must pay a tax when death benefits are received. • The employer can deduct premiums paid for employee group-term life as a business expense. • All employer-paid premiums are treated as income for the employee and subject to FICA and FUTA tax.

  17. Discussion Question To what extent can group-term insurance be used to meet insurance needs of select groups, for example: • self-employed persons • S corporation shareholders • employee group smaller than 10 employees • persons needing a permanent insurance benefit • persons desiring group universal life

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